Which of the following is a contractionary monetary policy tool?

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Question: Which of the following is a contractionary monetary policy tool?

Options:

Correct Answer: Increasing the Cash Reserve Ratio

Solution:

Increasing the Cash Reserve Ratio (CRR) is a contractionary tool as it reduces the amount of funds available for banks to lend.

Which of the following is a contractionary monetary policy tool?

Which of the following is a contractionary monetary policy tool?

Step 1: Understand what contractionary monetary policy means. It is a way for a central bank to reduce the money supply in the economy.
Step 2: Learn about the Cash Reserve Ratio (CRR). It is the percentage of deposits that banks must keep as reserves and not lend out.
Step 3: Know that increasing the CRR means banks have to hold more money in reserve.
Step 4: Realize that when banks hold more money in reserve, they have less money to lend to people and businesses.
Step 5: Conclude that by increasing the CRR, the central bank is reducing the amount of money circulating in the economy, which is a contractionary action.

No concepts available.